It has been an unprecedented financial year fraught with uncertainty for both salaried individuals and business owners. For the fortunate ones that survived the axe, it is time now to plan for some tax savings. For investors, the sole pure equity option, and as the 3-year return on investment numbers suggest, the best one too, remains the Equity Linked Saving Schemes (ELSS) offered by mutual fund houses. The reason for focusing on 3-year returns here is simply because the lock-in period for ELSS is 3 years, which makes it the shortest tenure tax saving instrument.
For the rest, where the underlying investment vehicle is debt, the minimum lock-in period is at least 5 years, with most being even longer. Of such investment options, the Public Provident Fund (PPF), remains the most popular tax saving debt-based investment for those averse to equity. The lock-in period is 5 times longer in this case, though the returns are tax-free, unlike the ELSS schemes.
Another popular option is the Unit Linked Insurance Plan (ULIP) offered by insurance companies, where the lock-in period is restricted to 5 years—though ideally one should hold it for longer tenures to optimize returns. In the case of ULIPs, the investor also has two way fungibility between Equity and Debt. A unique feature of ELSS, for those that face liquidity constraints, is that once the funds complete 3 years of investment, the same can be redeemed and reinvested without having to bother about a fresh infusion of funds to save taxes under Section 80C. Let us now proceed to cast a glance at a few ELSS funds that have performed reasonably well over the years.
Canara Robeco Equity Tax Saver Fund has an AUM of `1,476 crore and invests in a mix of Large cap (71 per cent) and Mid cap (25 per cent) with the balance 4 per cent in small caps. This fund’s 1-year return stands at 27.15 per cent and 3-year return at 13.74 per cent. It has invested largely in the Financial and Tech sectors. Axis Long Term Equity Fund has an AUM of`27,181 crore. It has currently invested mainly into Large Caps (around 84 per cent) with the remaining in Mid caps (14 per cent) and Small Caps (2 per cent). It has delivered returns of 16.44 per cent and 11.22 per cent over the 1-year and 3-year periods respectively. Its highest allocation is in the financial sector at 35 per cent.
ICICI Prudential Long Term Equity Fund (Tax Saving) has an AUM of `7,784 crore. Its portfolio comprises of Large cap (77 per cent), Mid Cap (12 per cent) and Small Cap (11 per cent). This fund has delivered returns of 14.35 per cent over a 1-year timeframe and 8.03 per cent over three years. Investors considering investments in ELSS would do well to consider completing it during the early part of the year so that their compounding tenure increases.
Ashok Kumar
heads LKW-India. He can be reached at ceolotus@hotmail.com